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The
term Hard Money, as it is referred to in the real estate and lending
industry, has developed through the years to refer to
non-conventional or non-traditional real estate loans. Most hard
money loans are funded by private money sources or administered
funds that come from outside of the main stream source, such as
bank, S+L’s, Pension Funds, Insurance Company Funds, or
Securitization Pools that end up at Wall Street.
The
soft hard money loans of today are those loans usually funded at higher
interest rates (11% to 16%) with more total points (4 to 10) or
shorter terms (12mo to 60mo) with commitment fees ranging from
$1,000 to $5,000 in exchange for the ease of obtaining a
faster cash type no-red-tape loan. These loans usually end up to be
the loan of last resort after the borrower has exhausted all other
“traditional” sources and wasted 3 to 6 months of his time.
Hard
money loans have one central theme. There has to be clean cut, hands
down equity in the property or project to give the lender a buffer
factor to invest his or her funds. This equity must be through
appreciation in the property over several years, or a big cash
infusion used to improve the property and it’s earning potential
at some earlier date. Most hard money lenders will go up to 50% to
70% of today’s value of subject property.
Soft
hard
money loans are made on commercial properties, residential
properties, and raw land.
Residential homes are more difficult due to homestead and
bankruptcy protection and foreclosure laws in most states.
Residential also falls under RESPA and truth in lending laws
requiring a lender to be licensed and have a branch office in the
state where the home is located, commercial does not. Raw
land is done with loan to value ratios of 50% to 60% of the land’s
appraised value.
Most
borrowers or loan brokers think of soft hard money loans being made to
folks with bad credit. Although some do fit this mold, most hard
money loans are made to borrowers with average to good credit. So,
why use soft hard money?
The
subject property to be purchased might be presently vacant or under
50% leased out. It may have fallen victim to poor demographics in a
changing neighborhood over the years. Most traditional lenders want
property in strong areas and less than 10-15 years old. The property
might have deferred maintenance or in need of renovations to obtain
a better value “once” improved. A lot of lenders just don’t
want to fool around with a loan that just doesn’t already fit the
guidelines, and will move on to the next deal.
Even
though soft hard money loans are based on low loan to value ratio's,
don't be mislead into believing that all the lender wants is the
property. Lender's "do not" want the property.
They want the interest on their money. They don't want the
headache and liability of owning real estate. For this reason, a
perspective borrower must have a “specific exit plan” on how
they will be able to pay off this soft hard money loan at the end of
12-24-36 month term. The lender wants to reinvest these funds into
another project.
Think of hard money loans as a stop gap or bridge situation,
to get the borrower through a rough spot to allow him to jump on an
opportunity today, when the traditional lender would pass.
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